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New reporting requirements regarding foreign investment and ownership

With the globalization of the economy, most private equity funds are likely to own companies based in the United States that have operations or subsidiaries outside the United States, and/or have interests in non-U.S. companies that have operations or subsidiaries in the United States. Recently, the U.S. Commerce Department Bureau of Economic Analysis (“BEA”) quietly took action that could impose significant new reporting requirements with respect to these portfolio companies.

These requirements relate to two economic surveys: (i) the BE-10 survey, “Benchmark Survey of U.S. Direct Investment Abroad,” which covers activities conducted during 2014 by non-U.S. affiliates of U.S. persons; and (ii) the BE-13 survey, “Survey of New Foreign Direct Investment in the United States,”which covers activities conducted in 2014 and going forward by U.S. affiliates of non-U.S. persons. These surveys are in furtherance of the BEA’s mission to promote a better understanding of the U.S. economy by collecting and disseminating relevant data for use by policymakers and the general public.

Notably, the BE-10 survey imposes a very broad requirement – every U.S. company that had any “non-U.S. affiliates” (as described below) during 2014 must either complete the BE-10 survey or file a claim for exemption by mid-2015, whether or not the U.S. company is contacted by BEA. The scope of companies covered by the BE-13 survey is somewhat narrower (though still relatively broad), as it requires a response from any U.S. company that engaged in reportable transactions involving non-U.S. persons during 2014, or engages in such transactions going forward. These mandatory requirements are in contrast to most existing BEA reporting requirements, which generally apply only to entities that are individually contacted by BEA to provide information.

I. BE-10 Survey of U.S. Direct Investment Abroad

The BE-10 survey is intended to collect information regarding U.S. companies that have non-U.S. affiliates and has been conducted every five years since 1989. In December 2014, BEA announced that the BE-10 survey will be reinstated to collect information with respect to activities that occurred during 2014. Every U.S. company that had a non-U.S. affiliate during 2014 will be required to take some action with respect to the BE-10 survey, regardless of whether they are contacted directly by BEA.

Who Must File

A BE-10 report is required of any U.S. person that had a “non-U.S. affiliate”– defined to include direct or indirect ownership or control of at least 10 percent of the voting stock of an incorporated non-U.S. business enterprise, or an equivalent interest in an unincorporated non-U.S. business enterprise, including a branch – at any time during the U.S. person's 2014 fiscal year, regardless of whether the company is contacted by BEA. This includes any non-U.S. affiliate that was established, acquired, seized, liquidated, sold, expropriated or inactivated during the 2014 fiscal year.

U.S. businesses that are contacted by BEA and did not have any non-U.S. affiliates during their 2014 fiscal year are required to file a “BE-10 Claim for Not Filing.”

What Must Be Reported

Any U.S. person that had a non-U.S. affiliate during that U.S. person’s 2014 fiscal year must file a BE-10A form covering the U.S. person’s “fully consolidated business enterprise.” Such U.S. persons also must file Form(s) BE-10B, BE-10C, and/or BE-10D with respect to the non-U.S. affiliates, depending on specific monetary thresholds met with respect to that affiliate’s activities during 2014 fiscal year. As noted above, even if a U.S. person does not have any non-U.S. affiliates, it still is required to file a “BE-10 Claim for Not Filing.” 1

The required information is expected to impose a potentially large burden on companies with numerous non-U.S. affiliates. BEA is considering issuing additional guidance to U.S. investment managers who may face significant reporting obligations under the reinstated survey.

When Reports Are Due

U.S. companies with fewer than fifty non-U.S. affiliates during their 2014 fiscal year must file the relevant BE-10 forms no later than May 29, 2015. For U.S. companies with more than fifty non-U.S. affiliatesduring their 2014 fiscal year, reports are due by June 30, 2015. U.S. companies that are directly contacted by BEA, but had no non-U.S. affiliates during the covered time period, must file the BE-10 Claim for Not Filing by May 29, 2015.

Potential Penalties

Failure to furnish information required by the BEA technically could result in significant civil penalties of up to $25,000 and/or injunctive relief commanding the U.S. company to comply, as well as criminal penalties for willful violations up to $10,000 and/or imprisonment for up to one year (for natural persons).

II. BE-13 Survey of New Foreign Direct Investment in the United States

The BE-13 survey is intended to collect data on the acquisition or establishment of U.S. business enterprises by non-U.S. investors and the expansion of existing U.S. affiliates of non-U.S. companies. The survey was created in 1977 and discontinued in 2009, but was reinstated in November 2014.

Covered Transactions

Under the reinstated BE-13 survey requirements, a report must be submitted for any transaction in which a non-U.S. person, either directly or through an existing U.S. affiliate:

Acquired at least 10% of the voting interest in an existing U.S. business that will continue to operate as a separate legal entity post-acquisition, where the total cost of the acquisition was greater than $3 million (Form BE-13A);

Established a new U.S. business in which it holds at least 10% of the voting interest, where the total cost of establishing the new entity was greater than $3 million (Form BE-13B);

Acquired a U.S. business and merges it into its own operations, where the total cost of the acquisition was more than $3 million (Form BE-13C);

Expanded its business operations to a new facility in the United States, where the total cost of the expansion was greater than $3 million (Form BE-13D);

Previously filed a Form BE-13B or Form BE-13D indicating that the established or expanded U.S. entity or facility still is under construction (Form BE-13E); or

Engaged in a transaction that would meet the above reporting requirements, but the value was below the $3 million threshold (BE-13 Claim for Exemption).

Who Must File

A report must be filed with respect to any transaction that falls into one of the covered activities described above, regardless of whether a company is contacted by BEA. Notably, the reporting obligation falls on the U.S. company at issue – that is, the U.S. company that was acquired, or the U.S. affiliate that expanded its business operations – and not on the non-U.S. parent.

For example, a U.S. portfolio company would be required to file a Form BE-13A if a non-U.S. person acquired at least 10% of the voting shares of the U.S. company in a transaction valued at more than $3 million. In addition, an existing U.S. portfolio company that is owned 10% or more by non-U.S. persons would need to file a Form BE-13C if it acquired a U.S. business and merged it into its own operations, or a Form BE-13D if it expanded its own business to a new facility, if the underlying transaction was valued at more than $3 million.

What Must Be Reported

Information required by the forms generally includes ownership of the U.S. business and its total assets, net income, and number of employees, among other financial and operational information. The specific information to be reported varies depending on the relevant BE-13 form. Reports filed with BEA are confidential and may be used only for analytical or statistical purposes. Information in the reports cannot be used for purposes of taxation, investigation or regulation, and copies of reports retained in the files of the filing person are immune from legal process. We also note that in cases where ultimate non-U.S. owners may be natural persons, rather than a corporate entity, BEA does not require that the identity of such individual owners be disclosed.

When Reports Are Due

For transactions conducted after November 26, 2014 (including transactions in the future), the relevant BE-13 form must be filed no later than 45 days after the acquisition is completed, the new legal entity is established, the expansion is begun, or the cost update is requested.

BEA also has announced that any entity that engaged in a reportable transaction between January 1, 2014 and November 26, 2014 must file a report covering such past activities. Such retroactive reports were due by January 12, 2015 – however, we understand that BEA will continue to grant requests for extensions that are submitted to BE-13@bea.gov that include the (i) the name of the prospective filer; (ii) the date on which the potentially-relevant transaction occurred; (iii) the nationality of the non-U.S. parent; (iv) the amount of additional time requested; (v) an explanation as to why the extension is necessary; and (vi) the anticipated form to be filed, if known. Based on our recent experience in securing extensions on behalf of our clients, we understand that BEA is willing to grant extensions until March 13, 2015 for companies to assess whether a BE-13 filing is required for activities that occurred during calendar year 2014.

Potential penalties with respect to failure to file required BE-13 forms are identical to those set forth above with respect to the BE-10 survey.

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